How traditional budgeting kills agility
Updated: Apr 5, 2018
Agility requires the capability to quickly and easily integrate changes in the flow of work in order to maximize value in a volatile internal and external environment.
Traditional budgeting requires a detailed commitment on a predetermined solution and on the resources to build the solution. In other words, it is based on the assumptions that we know everything up front and that change is bad.
As long as the budgeting policies for portfolios, projects and operations are based on these assumptions, any form of agility will generate friction with financial governance and therefore will likely be limited to small pockets in the organization. Traditional budgeting is in the way between local/team agility and organizational agility.
Traditional budgeting process remains legitimate for areas of the organization and initiatives that can be planned in detail. Great organizations are ambidextrous; they innovate while remaining efficient in what they’ve been doing since a long time. In this perspective both traditional and agile budgeting have their place.
"Projects have been originally designed more as a cost accounting instrument than as a way to deliver value."
Here are some shifts that might help moving toward agile budgeting
Separate traditional accounting control from project management
Projects have been originally designed first and foremost as a traditional cost accounting instrument, which doesn’t provide a flexible framework for the project team to organize resources to accommodate frequent business changes that happen naturally when projects progress. Therefore, the traditional accounting control function must be removed from project level.
Place budget controls at a level that allows project teams enough autonomy to adjust to changes
In order for project teams to have enough autonomy, budget controls should be associated with higher organization levels such as programs, project portfolios, or larger functional units, which is essentially to separate budget authorization from resource utilization.
Make budgeting information (not control) transparent at lower levels
The preceding point does not mean that we are budget-blind within these broader budget envelopes. We still monitor cost and budget but solely to the extent that this information enables fast and autonomous decision-making, such as re-allocating resources between projects of the same budget envelope.
Establish budget envelopes for business value areas
The goal is to maximize business value delivery for a given budget - aka "best bang for the bucks". To encourage focus on value, it is a good idea to establish budgets first and foremost along value creating business lines or product lines.
Estimate budget based on real capacity and time-boxes instead of bottom-up project-long aggregates
One of the top headaches of traditional budgeting is that the project budget as a whole is the result of adding up all its small parts’ individual budgets, each of which is an estimate based on many uncertainties and unknowns before the project starts. The better way is to look at the real resources available for a period of time and split it top-down among the projects. At the end of the day everyone is paid anyway; the total is known.
Free the organization from self-imposed financial compliance requirements
Most of the rules applied in traditional budgeting are actually self-imposed. Which means they can be freely removed without affecting compliance status to external regulations such as tax and audit. This highlights the difference between accounting and managerial accounting. Accounting policies are required by law whereas managerial accounting is implemented by and for the organization only. Since project budgeting is a form of managerial accounting, we are allowed to make it as lean and flexible as possible to adapt to our real management needs.
ABOUT THE AUTHOR:
Bruno Collet helps organizations benefit from agility, mainly in the area of digital transformation. He develops the Metamorphose framework to accelerate transformation results. His career has led him to collaborate with organizations in Montreal, Belgium and elsewhere, including the Société de Transport de Montréal (STM), National Bank of Canada, Loto-Québec and Proximus (formerly Belgacom). Holder of MBA, MScIT, PMP and PMI-ACP degrees, Bruno Collet is also author of a blog on agile transformation, and speaker at PMI, Agile Tour Montréal and Agile China.